Americans are worried about retirement and long-term care as they age. Aging comes with uncertainty, risks and financial concerns that can be difficult to navigate.
One of the biggest concerns can be related to your retirement funds. Specifically, questions about IRAs are frequent. As of 2023, approximately $12.5 trillion dollars were in U.S. IRAs.
So what happens to your IRA when you enter a nursing home? Most long-term care is delivered at home, however some will end up needing nursing home care. And one of the things Americans seem to fear most about nursing homes is the depletion of their assets, such as those in IRAs.
The reason for this is that while in-home care and facilities such as assisted living centers can also be expensive, nursing homes are the most expensive of these long-term care options. So extended nursing home stays bring with them the fear of losing assets and ending up on Medicaid.
These fears can be valid. But you can also plan ahead and protect yourself if you have significant assets in an IRA.
This article will walk you through the major systems in place that regulate Medicaid, IRAs, and nursing homes and how they interrelate, and will give you some strategies to explore in protecting your assets.
Can a Nursing Home Take My IRA Money?
Long-term care can be expensive. So what happens to IRA assets when you have to pay for the costs of a nursing home stay?
To clarify a few misconceptions, Medicaid exists to aid low-income Americans in providing health coverage. Second, nursing homes won’t exactly take your money, unless you are paying privately. Rather, it’s that Medicaid requires that you have little or no income and assets to qualify for Medicaid assistance.
Medicaid can be an effective and inexpensive form of health care coverage. However, having $100,000 or more in IRA assets will likely disqualify you from Medicaid eligibility. In fact, in most states you can’t have more than $2,000! There are allowances for spouses and estate recovery stipulations upon death. However, the low asset threshold for Medicaid means that a large IRA will disqualify you.
RELATED: Medicaid Is Not the Goal For Long-Term Care Planning
The resulting conundrum often comes in the form of a question: Do I dispose of these assets to become eligible? Or can I reorganize the assets to become eligible, or otherwise protect them?
The alternative is spending down assets in order to qualify for Medicaid, which is not always attractive for a prospective applicant. What does “spending down” mean, you might ask. It simply means that you’d pay for care with your own money/assets until you qualify for Medicaid. This can be an unattractive prospect for those who want to keep their retirement savings for other expenditures.
Medicaid has specific income and asset limits that contribute to its reimbursement structure. These limits can vary by state, which we’ll talk more about later, but a significant amount of assets, like those in an IRA, can ironically be a liability when applying for Medicaid coverage.
As we’ll also see in this article, it’s not just IRA assets that can be vulnerable.
What If I Have Fewer Assets?
Let’s say you don’t have $100,000 in an IRA, or anywhere near that. Medicaid is often a popular option for nursing home inhabitants for those with little or no retirement assets. In these situations, the fears around having to spend down existing assets and qualifying for Medicaid will not be as present.
According to suitability rules, generally speaking, anyone with less than $50,000 in assets should not be purchasing Long-Term Care Insurance. Medicaid coverage is often the better option in these situations.
Can Medicaid Take the IRA of My Spouse?
Medicaid will often consider assets owned by both spouses together. This means that a portion of the assets owned by a spouse may also count against you.
A community spouse is a spouse who lives independently, while you are the institutionalized spouse in a nursing home.
Spousal impoverishment provisions in Medicaid regulations specify that a community spouse can preserve a portion of your joint assets. The current maximum allowance is just north of $148,000 dollars. There are also income limits for your spouse, though they vary by state.
However, this does allow for the protection of some spousal assets by a community spouse. The government excludes up to the allowed limit when determining if you are eligible for Medicaid coverage.
The Medicaid Lookback Period
A common piece of advice is to reorganize your assets so that your IRA doesn’t count against you in Medicaid eligibility.
This could include shuffling assets into your home (either paying the mortgage or investing in improvements), trusts, or other financial vehicles.
The problem is that it’s only sporadically helpful in safeguarding assets when applying for Medicaid assistance.
The Medicaid Lookback Period refers to the fact that there’s a period prior to a Medicaid application where your transactions will be subject to review, and may count against your eligibility. Restructuring assets may still count against you if they’re within this period.
The federally-mandated lookback period used in every state is five years, though this can vary depending on both state and the reimbursement amounts allowed by Medicaid in your state. California, for example, has a more lenient lookback period of 30 months for certain Medicaid programs. Importantly though, even here, the term is 60 months depending on which type of reimbursement program you are applying for.
Additionally, according to the American Council on Aging, even financial vehicles such as so-called Medicaid Qualifying Trusts can be subject to this lookback period.
State-Based Eligibility for IRAs and Medicaid
If some of the restrictions surrounding Medicaid eligibility sound confusing, you’re not alone.
You can see exact eligibility rules for IRAs based on the state you live in, but it’s also important to explore all of your options with a trusted expert, some of which we discuss immediately below.
How Can I Protect My Assets From Medicaid?
If you’re outside of your state’s Medicaid lookback period that we discussed earlier, reorganizing your assets can be a useful strategy. However, it’s still important to know what assets can be counted against Medicaid eligibility, which requires discussion with a financial advisor.
Some of the other ways people sometimes account for this transition include the following:
- Annuities - These can be exempt from Medicaid consideration, but they are locked in other ways that can make them difficult to access.
- Home Equity - Moving money into a home can be considered. As mentioned earlier, this will generally fall into lookback period consideration, so the timing is important.
- Long-Term Care Insurance - We’ll discuss this option in more detail below, but particularly depending on the age at which you apply for Long-term Care Insurance, this can be an excellent way to protect IRA assets and other wealth through long-term care costs.
- Long-Term Care Insurance Partnership Program - This program allows people with specific Long-Term Care Insurance policies to qualify for Medicaid if they have exhausted the benefits of their policy. In this way, individuals can qualify for Medicaid and protect their assets and savings.
- Short-Term Care Insurance - Short-term care insurance policies generally act as cash indemnity plans that cover one year of care or less, though some can extend to approximately two years. They can be considered when Long-Term Care Insurance is not feasible, since the underwriting requirements are less rigorous.
- Trusts - Medicaid Trusts can protect your assets, but again are often subject to lookback periods, so the timing of them matters. Often, this is a consideration only when Long-Term Care Insurance is not an option.
How Likely Is It That I’ll End Up In a Nursing Home?
One variable to consider is that the majority of long-term care does not take place in a nursing home. If you’re in the planning stages of preparing for long-term care costs, it may be more beneficial to prepare for care eventualities such as:
- Adult day care
- Independent and assisted living communities
- Custodial, in-home caregiving provided by semi-skilled home health aides
The cost of these types of care can still be substantial, but it’s often far less costly compared to nursing home costs.
If you or a loved one believe that nursing home care is likely, though, it can be prudent to form a plan that accounts for all of your assets, and a possible application to Medicaid for care coverage.
Additionally, Medicaid reimbursement often presents other limitations. Medicaid requires Medicaid-approved facilities and, in some states, limited community care options. Medicaid’s reimbursement rates also occasionally affect staffing ratios in facilities. While the quality of the care you receive will be dependent on the individual facility, someone who pays out of pocket or with Long-Term Care Insurance will often have greater freedom of choice in facility care options.
Long-Term Care Insurance to Protect IRA Assets
Long-Term Care Insurance is a policy that helps to cover costs related to long-term care. Long-term care is legally defined as care that is expected to last for at least 90 days due to illness, accident, disability, or aging. Long-term care services come in many different forms. Individuals can receive care in facilities or at home.
As we mentioned in the section above, most long-term care doesn’t take place in a nursing home. However, nursing home care is considered long-term care, and so it can fall under the policy provisions of Long-Term Care Insurance.
Most long-term care is custodial. Custodial care is non-medical help with activities of daily living (ADLs) or supervision due to cognitive decline. ADLs can include:
One potential caveat here is that the costs of Long-Term Care Insurance premiums are tied in part to the age at which you obtain the policy. Additionally, the rigorous underwriting requirements to obtain a policy may make you ineligible.
For example, if you or a loved one is already in a nursing home, they will not be able to qualify for Long-Term Care Insurance. This is why the typical age for considering Long-Term Care Insurance is in your 50s, or even younger. If you’re ineligible for Long-Term Care Insurance, either due to age or medical conditions, alternative financial options may need to be considered, such as short-term care insurance or the other asset allocation options mentioned above.
Long-Term Care Insurance will cover many expenses not covered by traditional health insurance or Medicare. Policies are also excellent ways to protect financial assets, such as those in an IRA.
This type of policy can save you hundreds of thousands of dollars in the right situation. But this will only happen by being prepared, and creating a policy that meets your specific financial needs. This is best done with the assistance of a Long-Term Care Insurance Specialist.
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The Bottom Line: Planning for Financial Security
There isn’t one correct solution to what to do about your IRA assets when it comes to Medicaid eligibility. By now, though, we hope it’s clear that not having a plan of action is the worst possible situation to be in.
Whether it’s through research into the types of financial vehicles that will assist you, or speaking with a financial advisor to discuss options such as annuities, trusts and Long-Term Care Insurance, there are steps you can take to safeguard yourself.
IRA and other retirement funds can act as a financial net, but only you can provide the answer on how much of that you’re willing to spend down to qualify for Medicaid assistance. If that prospect seems daunting, it’s time to act!
If you’re interested in Long-Term Care Insurance options specifically, LTC News partners with insurance specialists who can help you create a policy that meets your needs and helps to protect your assets in retirement and beyond. Click below to speak to a specialist today!